The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Thursday, January 10, 2013

Warren Buffett says that 'black box' banks pose no threat to US economy

the nation’s lenders have rebuilt capital to the point where they no longer pose a threat to the economy.

“The banks will not get this country in trouble, I guarantee it,” Buffett, chairman and chief executive officer of Omaha, Nebraska-basedBerkshire Hathaway Inc. (BRK/A), said in a phone interview last week.

“The capital ratios are huge, the excesses on the asset side have been largely cleared out.” ...

Buffett’s firm has investments in at least four of the seven biggest U.S. lenders by assets, including a stake of more than $14 billion in San Francisco-based Wells Fargo & Co. (WFC), $5 billion in Bank of America and warrants that allow it to buy $5 billion of Goldman Sachs Group Inc. shares. Berkshire also has a holding in U.S. Bancorp.

“Our banking system is in the best shape in recent memory,” Buffett said.

My response to Mr. Buffett is: ask the banks you invested in to provide ultra transparency.

If the banks he has invested in are in such great shape, they should be happy to provide ultra transparency to prove Mr. Buffett right.

The bankers know that it is only by disclosing on an ongoing basis their current global asset, liability and off-balance sheet exposure details that market participants can assess whether the excesses on the asset side have been largely cleared out.

The bankers know that it is only by providing ultra transparency on an ongoing basis that we can be assured that banks will not get this country in trouble again.

The bankers also know that refusing to provide ultra transparency is running up a huge red flag that says despite Mr. Buffett's glowing comments the banks have something significant to hide.

Your humble blogger is not the only one with some skepticism with regards to Mr. Buffett's comments.

Banks have done little to address incentives that encourage excessive risk-taking even as balance sheets have improved, Michael Mayo, an analyst at CLSA Ltd. and author of “Exile on Wall Street,” said today. Compensation on Wall Street still favors short-term profit over long-term results that would benefit shareholders, he said.

“Twenty years of incentives that were out of whack have not been fixed,” Mayo said in an interview on Bloomberg Television. “You’re still going to have bank CEOs make a lot of money today, have their checks cashed, and be gone when the problems hit in the future.”

JPMorgan Chase & Co.’s trading loss of at least $6.2 billion last year rekindled concerns about the risks lurking on bank’s balance sheets.

It also called into question whether CEOs could keep tabs on those risks, said Neil Barofsky, former inspector general of the Troubled Asset Relief Program, which administered the bank bailouts.

“There’s so much opacity with these institutions,” Barofsky said on Bloomberg Television. “It’s really almost impossible to tell where those risks are.”

There is a reason that the Bank of England's Andrew Haldane refers to the banks as 'black boxes'.

Investors, too, have signaled their doubts about banks’ accounting. Even after last year’s stock rally, Citigroup, Bank of America, Goldman Sachs and JPMorgan all trade at less than book value, a calculation of how much a lender’s assets would be worth minus liabilities.

Add to the list the former UBS bosses who confessed that the large banks are too complex to manage. As a result they were ignorant of what was going on in their institution with something as basic as manipulating benchmark interest rates like Libor.

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.